Inflation and the Public Debt

The massive increase in the public debt since the financial crisis has raised the fear of inflation of many investors. Karsten Junius und Kristian Tödtman, DekaBank, show the effects via which higher rates of inflation may contribute to lower shares of public debt. Among them are rising receipts as well as a lower real burden of existing debt. The authors consider higher rates of inflation desirable in no country, however. In view of a sharply rising public debt, higher rates of inflation are just one of a number of evils. With the help of simulations, Junius and Tödtmann find criteria that raise the incentive for inflating the economy. Based on this, they identify those countries that have a stronger tendency to inflate than others. Because of the long remaining duration of its public debt, the UK is clearly among them. Within EMU Greece, Portugal, Ireland and Italy have greater incentives to inflate than Germany and the Netherlands. This could raise the conflict potential in EMU.